Introduction to Accounting
Chapter 1
ACCOUNTING DEFINED
Accounting has been defined in so many
ways:
 Accounting is the art of recording,
classifying and summarizing, in a
significant manner; and in terms of
money, transactions and events
which are in part at least of a
financial character, and interpreting
the results thereof.
(Committee on Accounting Terminology of the American
Institute of Certified Public Accountants)
 Accounting is the process of
identifying, measuring, and
communicating economic
information to permit informed
judgment and decision by users of
the information.
(American Accounting Association )
 Accounting is a service activity. Its
function is to provide quantitative
information, primarily financial in
nature, about economic entities,
that is intended to be useful in
making economic decisions.
(Accounting Standards Council)
BASIC PURPOSE OF ACCOUNTING
-Is to supply financial information
to users to help them make informed
judgments and better decisions.
Accounting provides the following
information:
 The resources and obligations of
the business
 Interest being paid on the current
debt/liabilities of the business.
 Cash inflows and outflows
resulting from business operations
Ex:
-Management analyzes the existing
debts/liabilities of the business to check if
it could still handle additional debt as a
result of borrowing from the bank. Cash
inflows and outflows are analyzed to see
other possible sources of financing or to
determine how the business would repay
the bank loan, if it ever materializes.
- If the company applies for a loan,
then the bank's loan officer will then
require the company to submit financial
information to be able to determine
whether to approve or reject the loan
application
ACCOUNTING – THE LANGUAGE
OF BUSINESS
-Accounting is the language used
to communicate financial information to
interested parties such as business owners,
management, employees, the government,
etc.
Through accounting, different
users of financial information understand
what is happening in the business
enterprise.
BUSINESS DEFINED
Business - (or enterprise or firm) is an
organization engaged in the trade of goods,
services, or both to consumers.
Profit-oriented business - goal is to earn
profit to increase the wealth of owners.
 -includes food manufacturers, gas
stations, bookstores, etc.
Non-profit organization- is an
organization that uses surplus revenues to
achieve its goals rather than to distribute
them as profit or dividends.
-They are permitted to generate
surplus revenues but they must be retained
by the organization for its self-
preservation, expansion or plans.
- Ex: Charitable organizations and
educational are non profit oriented
TYPES OF BUSINESS ENTERPRISES
ACCORDING TO ACTIVITY
Service Business - offers services and
typically generate a profit by charging a
fee. This is the simplest among the three.
Ex:
 Educational institutions charge
tuition and miscellaneous fees for
educational services
 Jeepneys, bus lines, airlines and
other transportation businesses
charges fares.
 Agencies collect agency fees from
clients in exchange for security and
janitorial services.
 Accountants, doctors, lawyers,
architects give professional advices
and earn profit by charging
professional fees.
Merchandising Business or Trading
Concern - buys goods and sells them
without any alteration made on their state
or condition.
Ex:
 Sari-sari stores
 Bookstores and drugstores
 Hardware stores
Manufacturing Business - buys goods
called raw materials, then converts them
into finished products.
-The manufacturing business is the
most complex because of the conversion
of the raw materials into finished goods.
Ex:
A shoe manufacturing business
buys raw materials (leather, rubber, and
supplies such as thread, glue, laces and
ringlets), uses the skills of workmen to
convert these raw materials into shoes, and
sells the finished shoes to customers at a
price higher than the cost of producing
them.
LEGAL FORMS OF Business
(BUSINESS ownership)
Sole Proprietorship - has only one owner,
the proprietor.
-The proprietor may operate on
his/her own, or may employ others as
business operations expand.
-Many successful business
undertakings started as sole
proprietorships because this is the most
basic legal form of business.
Ex:
 Mobile phone repair services
 Gravel-and-sand enterprises
 Cottage industries and other small-
scale
Advantages:
 Easiest to form
  Less complex business transactions
 Minimal regulatory requirements
 Decisions can be made and
implemented faster.
 The proprietor enjoys all the profits
earned by the business.
Disadvantages:
 Limited ability to raise capital
o A business only expands in
proportion to the resources
contributed by the proprietor
and on what the proprietor's
expertise is.
 Proprietor does not receive the
benefit of a second opinion
 Proprietor bears the risks and
losses of the enterprise.
 Unlimited liability
Partnership - an association of two or
more persons
-Partners agree on how the
business will be managed, the amount of
capital contributions from each partner,
how profits/losses will be divided among
them, and the form and mode of settlement
in case of withdrawal or death of any of
the partners.
-Are governed by the Civil Code of
the Philippines.
Advantages:
 Easier to organize compared to a
corporation.
 Management of the business is
usually shared among partners, so
more ideas are exchanged and
brainstormed, resulting to better
decision- making.
 Can raise more capital compared to
sole proprietorships.
Disadvantages:
 Disagreements regarding ideas and
management style
 It may be dissolved by an
agreement, withdrawal, death, or
incapacity of a partner.
 Unlimited liability
Corporation - an artificial being created
by law. As such, the corporation can sue
and be sued. Is managed mainly by the
board of directors
-A corporation has standardized
procedures for its creation, organization,
management and liquidation as specified
in the Corporation Code.
-most complex form of business
organization.
Stockholder - a person who invests and
becomes an owner of the corporation.
Each share purchased, a stockholder is
issued a certificate of stock.
-They may transfer their shares
without the need to obtain the consent of
other stockholders.
Advantages:
 Greatest capacity to raise capital,
this is done by selling shares of
stock to the public.
 Unlimited life. After 50 years then
can be renewed.
 Limited liability (the liability of the
stockholders is limited to the
investments).
 Can easily raise capital
Disadvantages:
 High cost of forming and managing
 Subjected to greater scrutiny,
regulation, control and supervision
by the government.
  Complex management management. It processes raw data and
 converts them into meaningful information
 Has limited powers, as stated in the that will be useful for decision-making.
Corporation Code of the
Philippines and its own Articles of
Incorporation.
 Subjected to double taxation.

ECONOMIC DECISIONS

-Reliable information is needed,

this comes in the form of accounting
information. Also requires great skill,
timing, and sound professional judgement
-Management makes decision as to
the proper selling price goods should be
sold, and management needs the total cost
of these goods and the selling prices of
competitors.
-Management must decide when to
place an order for goods to be acquired.
For them to do so they need to know the
lead time, from the time of placing an
order to the time of the goods are
delivered; they likewise need to know the
balance of the goods still on hand and the
quantity of goods expected to be sold
during the lead time, among many others.

FINANCIAL INFORMATION
-Decision making process requires
financial and non-financial information.

Financial information - a summary of all

the transactions of the business over a
period of time.

Bookkeepers/ Accountants - records the

Transactions of the business

Accounting - a service function to

 USERS OF FINANCIAL
STATEMENTS
 Investors - The “providers of risk
capital”. Are concerned with the
risk inherent in and return provided
by, their investments. They need
information to help them determine
whether they should buy, hold or
sell their investments, and to assess
the ability of the enterprise to pay
dividends.
 Owners - need financial
information to determine if the
business is profitable and whether
to continue, improve or drop it.
 Employees -needs information
about the stability and profitability
of their employers, and so they can
assess the ability of the enterprise
to provide remuneration, retirement
benefits and employment
opportunities.
 Lenders/Creditors - needs
information to determine whether
their loans and interest will be paid
when due.
 Suppliers and other trade
creditors - needs information to
determine whether amounts owing
to them will be paid when due.
Trade creditors are likely to be
interested in an enterprise over a
shorter period than lenders unless
they are dependent upon the
continuation of the enterprise as a
major customer.
 Customers - needs information
about the continuance of an
enterprise especially when they
have a long-term involvement with,
or are dependent on, the enterprise.
 Government and their agencies/
Regulators - interested in the
allocation of resources and the
activities of enterprises. They also
require information in order to
regulate the activities of
enterprises, determine taxation
policies and as the basis for
national income and similar
statistics.
 The public - Enterprises affect
members of the public in a variety
of ways. For example, enterprises
may make a substantial
contribution to the local economy
in many ways including the
number of people they employ and
their patronage of local suppliers.
Financial statements may assist the
public by providing information
about the trends and developments
in the prosperity of the enterprise
and the range of its activities
THE ACCOUNTANCY PROFESSION
-While accounting as an
information system is not a new concept,
accountancy as a profession is relatively
new. Accounting is a profession because it
has the attributes required of a profession,
as shown below:
-Mastery of a particular
intellectual skill, acquired by training and
education. Accounting requires a person to
finish a degree in Bachelor of Science in
Accountancy and to pass a very rigorous
government examination administered by
the Professional Regulatory Board of
Accountancy. Only then can he/she use the
title “Certified Public Accountant” (CPA).
-Adherence by its members to a
common code of values and conduct
established by its administrating body,
including maintaining an outlook which is
essentially objective. The Code of Ethics is
mandatory for all CPAs. It provides
guidance for CPAs whenever they
encounter “what is the right thing to do”
situations.
Acceptance of a duty to society as
a whole (usually in return for restrictions
in use of a title or in the granting of a
qualification). Investors, creditors,
employers and other sectors of the
business community, as well as the
government and the public at large rely on
CPAs for sound financial accounting and
reporting, effective financial management
and competent advice on a variety of
business and taxation matters.
THE PHILIPPINE ACCOUNTANCY
ACT OF 2004
-The accountancy profession is
governed by law. Republic Act No. 9298,
the Philippine Accountancy Act of 2004,
was signed into law with the following
objectives:
 The standardization and regulation
of accounting education;
 The examination for registration of
certified public accountants;
 The supervision, control, and
regulation of the practice of
accountancy in the Philippines
 Article II of the Republic Act No.
9298 creates the Professional
Regulatory Board of Accountancy,
the agency tasked to enforce the
provisions of the Philippine
Accountancy Act. It is also granted
the right to issue, suspend, revoke,
or reinstate CPA certificates for the
practice of the profession. The
Board is composed of a chairman
and six (6) members, all of whom
are appointed by the President of
the Republic of the Philippines.
CPA BOARD EXAMS
-Passing the CPA Board Exams is
a requirement in order to join the
accountancy profession. Any person
applying for examination shall establish
the following requisites to the satisfaction
of the Board that he/she:
 is a Filipino citizen;
 is of good moral character;
 is a holder of the degree of
Bachelor of Science in
Accountancy conferred by a
school, college, academy or
institute duly recognized and/or
accredited by the CHED or other
authorized government offices; and
 Has not been convicted of any
criminal offense involving moral
turpitude.
 The licensure examination for
certified public accountants shall
cover, but are not limited to, the
following subjects:
o Management Services
o Regulatory Framework for
Business Transactions (RFBT)
o Auditing
o Financial Accounting and
Reporting (FAR)
o Advance Financial
Accounting and Reporting
(AFAR)
o Taxation
 To be qualified as having passed
the licensure examination for
accountants, a candidate must
obtain a general average of
seventy-five percent (75%), with
 no grades lower than sixty-five
percent (65%) in any given subject.
 In the event a candidate obtains the
rating of seventy-five percent
(75%) and above in at least a
majority of subjects as provided for
in this Act, he/she shall receive a
conditional credit for the subjects
passed. Such candidate shall take
an examination in the remaining
subjects within two years from the
preceding examination, and if the
candidate fails to obtain at least a
general average of seventy-five
percent (75%) and a rating of at
least sixty-five percent (65%) in
each of the subjects reexamined,
he/she shall be considered as failed
in the entire examination.
 Candidates who fail two (2)
complete examinations shall be
disqualified from taking another set
of examinations unless he/she
submits evidence to the satisfaction
of the Board that he/she enrolled in
and completed at least twenty-four
(24) units of subject given in the
licensure examination.
SECTORS OF ACCOUNTING
PRACTICE
CPAs generally practice their profession in
four sectors:
 public practice,
 commerce and industry,
 education or the academe, and the
 government.
PUBLIC PRACTICE
This sector includes individual
practitioners, small accounting firms,
medium sized and multinational
accounting firms that render independent
professional accounting services to the
public. CPAs charge professional fees for
these services. Examples of services
provided by CPAs are:
 Auditing – this is the most
common service being provided by
CPAs. It involves the independent
examination of financial statements
for the purpose of expressing an
opinion on the fairness of these
statements. Users of audited
financial statements have
reasonable assurance that the
information they are using are free
from material misstatements due to
fraud or error.
 Tax services – this includes the
preparation of tax returns for
various clients, provision of advice
on tax matters, and representation
of clients in tax cases. CPAs have a
reputation of being experts in
accounting and taxation.
 Management consulting services
– involves providing advisory/
consulting services to clients on
matters of accounting, finance,
business policies, organization
procedures, budgeting, product
costing and the conduct of
operations.
COMMERCE AND INDUSTRY
Accountants are employed in various
positions, such as:
 vice-presidents for finance,
 chief accountant (controller),
 cost accountant,
 internal auditor, or
 budget officer.
 The highest accounting officer in a
business organization is known as the
controller (or comptroller).
Accountants in commerce and
industry (or private accountants) assist
management in planning and controlling a
company’s operations.
EDUCATION
 This area employs accountants as
professors, reviewers, or
researchers.
 They take steps to clarify and
address emerging accounting issues
encountered by accountants in
other sectors.
 They share the results of discussion
and research with colleagues in
other sectors.
 Educators also prepare aspiring
CPAs for the Licensure
Examinations.
GOVERNMENT
Accountants may be hired as:
 staff
 auditor
 budget officer
 consultant in government units
like:
o Commission on Audit,
o Bureau of Internal Revenue,
o Department of Finance,
o Department of Budget and
Management, and the
o Securities and Exchange
Commission.
ACCOUNTING AND BOOKKEEPING
DISTINGUISHED
Bookkeeping - the procedural or
mechanical aspect of accounting. It
involves the set-up, update and
maintenance of accounting records.
Accounting is conceptual and goes
beyond bookkeeping.
Accounting includes the
interpretation of information recorded
under bookkeeping. Bookkeeping may be
done even by properly trained non-
accountants, while the practice of
accountancy can only be done by certified
public accountants.
BRIEF HISTORY OF ACCOUNTING
-Accounting traces its roots to the
Middle East region, where as early as 8500
BC, tradesmen use clay objects to
represent commodities such as flocks of
sheep, jars of spices and oil, bolts of
clothing and other goods.
-Some archaeologists later
unearthed clay tablets marred with
symbols and other writings – and
interpreted them to mean records of goods
sold and other statistics kept at that time.
-The ancient civilizations of
Babylon, Greece and Egypt also used clay
tablets (in later years, papyri were used as
the medium for record-keeping). These
records document wage payments,
material requisitions and costs of labor,
which only show that accounting is
already in use even during Biblical times.
In the 13th to 15th centuries, with
the growth of trade and commerce, more
systematic record-keeping methods were
developed. Florentine, Venetian and
Genoan merchants used these methods to
keep track of their business. Double- entry
records first appeared in Genoa in 1340
AD.

LUCA PACIOLI AND THE SUMMA
In 1494, Friar Luca Pacioli wrote a
book which contains discussions on the
double-entry bookkeeping system. The
book was entitled Summa de Arithmetica,
Geometria, Proportioni et Proportionalita
(Everything about Arithmetic, Geometry,
Proportions and Proportionality), a
summary of the existing mathematical
knowledge at the time. Because of the
Summa, Friar Pacioli was considered the
Father of Double-Entry Bookkeeping.
THE INDUSTRIAL REVOLUTION
In the mid-18th to the mid-19th
centuries, the Industrial Revolution altered
the way goods are produced: from the
artisan/craftsman method to the assembly-
line method. Large volumes of
commodities were produced in factories
and commerce boomed. With this
development came the problem of
accounting for the costs involved in
assembly-line manufacturing, particularly
overhead costs. Cost accounting, the
specialized field of accounting which deals
with the allocation of costs to products,
was developed to address this problem.
The corporate form of business
organization was created to accommodate
the need for increasingly large amounts of
funds which are required to finance the
expansion of business during this period.
The funds accumulated were used mainly
to acquire machinery, build factories, and
streamline manufacturing methods and
processes.
With the birth of corporations, a
business can have many owners. The
owners are gradually separated from the
business operations, and other people are
hired to manage the enterprise. Because of
this, there was a need for those who
manage the business to periodically
account for the performance of the
corporation.
Between management and the
shareholders, a potential conflict of
interest exists – management may be too
optimistic in the way they report the
financial condition and results of
operations of the business; owners, on the
other hand, want a true and fair view of the
status of the business. This conflict of
interest led to the demand for financial
statement audits.
FIELDS OF ACCOUNTING
More complex accounting policies
and procedures were developed to suit the
changing needs of users of financial
information. Standards were developed to
promote uniformity in the selection and
application of accounting policies and
procedures. Different fields of accounting
emerged, each one addressing a different
particular need:
 Financial accounting - focuses on
the preparation and presentation of
general-purpose financial
statements with the aim of meeting
most of the needs of external users.
 Management accounting -
concerned with financial reporting
for internal users, such as
management. These users have
control over the accounting system
and can specify precisely the type
of reports needed for use in
decision-making.
 Cost accounting - measures a
business’s costs to help
management in controlling
expenses. Cost accounting records
guide managers in setting prices for
their products and services to
 achieve greater profits.
 Tax accounting - has two aims:
compliance with the tax laws and
minimizing the company’s tax bill
through legal means. Accountants
provide tax planning and tax
consultancy services, such as
giving advice to clients on what
type of investments to make and on
how to structure business
transactions
 Government accounting -
encompasses the process of
analyzing, classifying,
summarizing and communicating
all transactions involving the
receipt and disposition of
government funds and property and
interpreting the results thereof. In
other words, the focus of
government accounting is the
proper custody, disposition and
accounting for public funds.
 Accounting and Information
Technology - The advent of
Information Technology (I.T.)
revolutionized accounting and gave
it a big boost in terms of efficiency
and timeliness. Accounting
procedures that used to be time-
consuming can now be performed
with speed and accuracy by
computers. Accounting
applications have been written to
suit different kinds of business
organizations. It is comforting to
note that computers can take over
most of the clerical aspects of
accounting, but they can never
replace the professional judgment
of an accountant.
CHAPTER SUMMARY
Accounting - is an information system
that provides quantitative information for
use by decision-makers.
-is the process of identifying,
measuring and communicating economic
information to permit informed judgment
and decision by users of the information.
Basic purpose of accounting - is to
supply financial information to users of the
information to help them make informed
judgments and better (economic)
decisions.
Accounting as a language - used to
communicate financial information to
interested parties such as business owners,
management, employees, the government,
etc.
Bookkeeping - is the procedural or
mechanical aspect of accounting.
Accounting is broader compared to
bookkeeping.
-Businesses aim to earn income or profit
by providing services or selling goods.
Nature of businesses- either service
businesses, merchandising businesses, or
manufacturing businesses.
Legal form of businesses - classified
according to the ownership of a business:
as either sole proprietorships, partnerships,
or corporations.
Accounting as a profession:
 Mastery of a particular intellectual
skill
 Adoption of a common code of
values or conduct
  Acceptance of a duty or
responsibility to society.

CPAs generally practice their profession in

four sectors:
 Public practice
 Commerce and industry
 Education or the academe
 Government.